Monday, November 26, 2007

An Insurance Man Builds a Lively Business in Death

So I just finished reading this piece in today's WSJ (online sub req'd). I've never followed the insurance industry that closely, except back in my Primerica Financial Services days (yes, yes) so I had no idea that viaticals had fallen off. This is an interesting concept, and it just goes to show that any stream of income -- no matter in which direction it moves -- can be securitized.

This does make me wonder how you assess the risk of a policy, or of a portfolio of policies. As the article states, the investor would prefer that the insured have a higher risk of immediate death. The closer the seller of the policy is to death, the more I could see the payout being. However, considering that the risk of death is likely based on health and well-being factors, I wonder how you get access to that information legally in this age of HIPAA, identity theft, and all the other perils associated with information access.


Still, it looks like just a matter of time until these things are packaged and re-sold, creating a secondary market for such policies. I guess you could tranche based on the likelihood of death, e.g. the type of illness, the organs affected, length of illness. I'm sure some math Ph.D.s somewhere will come up with models for all of that.

Financial innovation at its finest.

Saturday, November 24, 2007

Personal Round-Up: November Edition Part II

Ahhh! Where were we?

Yes, I believe I was going to talk about real estate. Things have been markedly slow on the REI front, although I just got a lead on a nice deal around Baltimore that I have replied to. The price works, and I know I can get the financing even if I can't put any money down. Again, the importance of that clean credit cannot be stressed enough!

Anyway, the deal is a duplex which is being rented out for a decent (not great) amount. It should cash flow however, which is most critical. Both units are 1 bedroom/1 bathroom. I'm still gathering information since this just slid across my inbox earlier today, but so far, I'm such a "YES!" on this deal. I've e-mailed my contact with some questions and we'll see what the owner comes back with. I do like this deal a lot, but like any other deal, I'm not in love with it and I won't allow myself to fall in love with it.

Its funny though because the real estate partnership I am part of has been more active in the weeks since we agreed to turn down the LLC than in the months prior. WTF??? Isn't it supposed to be the other way around? Had this much energy and effort gone into things before, we probably wouldn't have decided to shut the operation down in the first place.


I've also had some interest in some of the domain names I have available for sale. Its slight, so I won't go into a huge amount of detail, but it looks like I may have found a potential partner to help me get some of these either sold or leased. We'll see what comes of that next week. This is the reason I don't like holidays -- it slows down the flow of business.

My modeling efforts have come to a bit of standstill over the last few days, but I'll get back to work on them starting tonight. I borrowed a model from RedBrick Partners for rental real estate cash flows, and that's my primary model right now. The model I have been developing takes a lot of cues from RedBrick's model, but adds some personal twists. I'd go so far as to say that it is far more conservative than RedBrick's model. That only makes sense, because the numbers should expose a deal as being a win or a loss. I really don't want to have to visit a property to make that determination, and so far, I think the RedBrick model is the best I have seen. Once I mix their methodology with my personal experience, I think I'll be able to achieve the kind of reliable value estimates that will give me a real advantage.

As for my equity valuation model, I am seriously behind on constructing that. Right now, it has a deep value bent to it, but I want to add some growth factors. I really have to do some digging at this point, some hardcore research, because CAN SLIM and other well known factors are only going to yield alternative betas at this point. I'm hunting for real alpha, not beta in alpha clothing. So this will be a bit of a back burner issue for now, while I sort out some other things. I guess I'll finally get a chance to play with Trade Strategist now though, as I start backtesting some proprietary factors. Woo hoo!! (Aside: I REALLY should have gone to the AlgoTrading conference last month! Damn! That's what I get for being reasonable.)

So the recent market action has been pretty painful. We've seen a lot of "buy the dips" days after the swoons, but I really think those BTD folks are setting themselves up to get hurt. I think Bonddad has pretty much summed that up perfectly. As I said in part I of this missive, unless you've found some hidden store of value somewhere, its probably best to just accumulate cash right now. You really have to wonder how brainwashed people are to continue buying in the current environment. More power to 'em. God bless 'em. I just don't have the same conviction about US equities right now. Since I do have a few international bond funds in my sights, I think I'll spend some time tonight and tomorrow reviewing their holdings to see which ones look to benefit from rate lowering by foreign central banks.

As for me, I have to admit I had a pretty good day today. (Saturday, 24 November.) I was able to clean up the whole apartment pretty much, get out and buy some necessities, update this blog, and a whole bunch of other little things that were waiting to get completed. Now, I'm going to bed. I've got to be at work in a few hours.

Until next time, gentle readers...

Wednesday, November 21, 2007

Personal Round-Up: November Edition

I apologize to all of you, my readers, for the HUGE gap in posting. I've been a bit off the grid, which sounds odd, I know, considering I work in the Internet business. I've just not had the chance to catch up, read, study, synthesize and think as I usually don't have time to. I really do it all for you, all 3 of you. Without you, there would be no me.

So let's get caught up generally. As noted previously, there is progress on the debt reduction. In this environment, with the markets taking the drubbing they are, and the dollar becoming ever more toilet paper-ish, that's a good thing. A little deflation is probably in order. Just a little though. I don't want deflation on the scale of Japan from '89 until 2002/2003. (Some, including yours truly, might say Japan has yet to really escape it.) I definitely won't be mad about 10% or more price cuts in my local RE market. You won't hear me complaining about share prices taking some downward action either. I think, over the short to intermediate time frame, the US economy is dynamic and resilient enough to survive and thrive. Taking a longer term stance, I plan to diversify my holdings into non-dollar denominated assets like any risk-adjusted, absolute return mandated manager. I've like Japan for a number of years, and I have some dollars there now; I think that will be increasing. Otherwise, I have to bump up my international and emerging market fixed income exposure to 5% as my asset allocation dictates. An additional 3.5% of emerging market equity exposure is lacking as well, so we'll turn the spigot on in those directions. Maybe I'll hold off a bit on FI though, until we start seeing a wee bit more stabilization in rate increases from foreign central banks. Yeah, that's the ticket.

I think I'm back down to a balance of $7200 on my AmEx. The only reason it is so high is because I just put $4000 into my car to replace the transmission, head lights and catalytic converter. Thankfully, all of that came out of my emergency funds. (Well, except maybe the headlights.) If you don't have such a fund, you're doing yourself an immense disservice and quite honestly, you're not managing your risk at all. I mean, that's pure neglect. Life happens. Some liquid funds (hopefully not in a money market account, as things are going these days) are order of the day, because you never know when $4000 worth of expenses will show up on your doorstep mere weeks from winter. If anything, I feel confident that my trusty 8 year old Honda Accord will survive the coming season now.

Now, I really have to get my daily expenses under control, especially food and snacks. I've been tracking my monthly expenses in Excel since last month. I used to do this more regularly, but it fell to the wayside with all the personal circumstances I have been dealing with this year. I figure doing this for the 4th quarter will really give me visibility into my problem areas, however, I know instinctively that food is kicking my ass. There is no good reason I should spend as much as I do, not even the fact that I don't cook. I think I use food for comfort as much as nutrition. Thank God I'm always moving and my metabolism is still high, otherwise I'd be 30 pounds heavier. Since food is my biggest financial weak spot, I'm going to have to start cooking though, and I really don't relish the thought. As I like to say, that's why I have money, so someone else can do it. I do what I'm good at, they do what they're good at, and everyone gets a fair exchange. It had been working for me...until now. We'll see how December looks, as I have to acquire some ski gear for my planned snowboarding expeditions. For now, I'm just going to keep an eye on the expenses, purchase frozen meals for work, and just stay present to my spending. Once the 4th quarter tally is in, I'll look at putting in place measures to rein in the food spending. Unless November is particularly horrible.

I figure that by the end of the year, I can get my AmEx balance down to $5K, which is roughly 1/3 of the high water mark this year. Again, since I only use the AmEx, I really am not worried about this too much. My other card is only to be used in case of emergency, when all else fails. Until such time, it will sit in the freezer, entombed in ice, and helping me build up actual credit history. I figure all of this should get my credit scores back in the 750+ range. (Only one of them is above 770 right now, and 1 is actually below 700.)

On the business front, I'll file Form TX next week, once things start opening up again after Thanksgiving. Form TX is the copyright submission form from the US Copyright Office. My partner and I are submitting our source code to this process, for legal protection. There will be more of this in the future, undoubtedly. I also received the trade name application back from Maryland, along with the check. Seems they were missing a signature. It would have been very helpful if they had bothered to tell me a signature (or 2) was (were) missing the day I hauled myself up to Baltimore to file it. Sometimes I wonder... Anyway, there is slow progress on the software front. Not quite as dynamic as we'd like, but we're getting there. Once Santa Season really kicks in, my partner, student that she is, will have more time to really hack out some code. Being a student is a HUGE drain on one's productivity. In the meantime, I have a base Apache 2.x build in place for our website, and since my partner is a Ruby on Rails fanatic, I have some work to do setting up our application server. we plan to launch our public alpha on 1 January 2008, so there is a bunch of work to do!

Thanks to the recent market action, there hasn't been much (forward) progress in the net worth department. Such is life. This is why we stay liquid, or at least keep our credit ratings solid. When the time comes to buy, we should have some powder at the ready (or at least be able to negotiate it on reasonable terms).

I've been having some ideas for little businesses to generate cash flow recently. I hate it when this happens. While I'm all for "getting a bigger plate" as my Landmark Education coaches are fond of saying, I haven't quite mastered it as yet. I am making progress. I'm using my calendar regularly, and scheduling almost every moment of my day. Now if I can just execute on getting more sleep, I think I'd have a huge breakthrough in my overall effectiveness. In the meantime, anyone out there have any experience in the bumper sticker business? I have some ideas for stickers, and I think I'll have my roommate do some mock-ups after Thanksgiving. On second thought, I *do* have Photoshop installed, and the holiday is tomorrow. I think its clear what I'll be working on this Thanksgiving while I await the feast my mother is preparing. Now I need to get my head around the business of making money with bumper stickers. There has to be a way to do it!

Ok, I think that's it for this post. Anyone who is still awake, look for part 2 coming soon. I'll talk about the real estate investing and take a closer look at the recent markets and news. Maybe I'll get into a brief discussion of my modeling efforts too.

Until part II...

Tuesday, November 13, 2007

Managing Risk I

You see how risk has become this objet de l'attention for me. It has been permeating all my discussions of investing, whether in capital markets or real estate. What are the risks? How do you model them? How do you price them? What potential blind spots are there?

For a while I've had an idea to model real estate risk, from an investor's perspective. I started working on the model - identifying factors, working to create initial values for them based on the limited data available from the few deals my partners and I had done, etc. It is still far from being complete, but it is coming along.

While thinking about this problem - modeling real estate investment risks - I started thinking about information markets and basic value investing. Essentially, you have to discount your price or present value (PV, for all the DCF wonks) by some (hopefully) standard amount for each factor where you have incomplete information. The amount of the discount should be roughly proportional to the completeness of the information you have about that factor.

In an information market, prices should (will?) be discounted by some amount based on the completeness of the information about the product. Real estate is no different from the stock market in this regard. We see this in the pricing of financial stocks, especially the bulge bracket IBs (Goldman, Morgan Stanley, etc.). The argument goes that since their operations and holdings are so opaque, the market applies a discount to their share prices for the uncertainty about how they make money, assets they carry on (and off) their books, etc. It makes total sense. If I can't tell what's going on with a house structurally (say, I purchased at an auction of some sort and was not allowed to have an inspection done, or there was no time for the inspection), then there should be some discount applied to the price due to that information shortfall.

Anyway, that's just a taste of an ongoing project of mine. I am working on learning how to model risk in various markets. If anyone has any suggestions, whether they are articles, books, or authors to read, classes to take, or any other ways to learn how to model, please let me know. I know that over time, my modeling will improve, but I am not above accelerating the process.

Until next time, because I think I have more to say on this and I just needed to get this one out the door...

Thursday, November 08, 2007

Pricing Risk

I don't know who, among my readers, saw this article in the NY Times a few months ago. Most likely, all 3 of you. (What's up, G?!?!) I have to admit to being fascinated by this one. I haven't let it out of my browser since originally reading it, and I'm going to finish reading it now before I go to sleep. Risk management would appear to be the theme in my investing right now.